Benefits Recovery Should Not Hurt Participants

April 16, 2013 (PLANSPONSOR.com) – The U.S. Supreme Court has decided that a health plan can recover benefits paid when an employee is reimbursed by a third party, but not to the detriment of the plan participant.

The high court said the terms of the benefit plan override any equitable doctrines meant to prevent unjust enrichment, and that Section 502(a)(3) of the Employee Retirement Income Security Act (ERISA) authorizes such relief as will enforce “the terms of the plan” or the statute.

However, in US Airways v. McCutchen, the court found that the US Airways plan says nothing specific about how to pay for the costs of recovery of the benefits. The court noted that, after paying attorney’s fees, James McCutchen received $66,000 in reimbursement of car accident-related damages, but US Airways sought $66,866 in reimbursement for medical expenses it paid for McCutchen following the accident. “A contract should not be read to provide that an insurer can free ride on the beneficiary’s efforts, and the beneficiary may be made worse off for having pursued a third party,” the court said.

According to the high court’s opinion, the plan’s terms fail to select between these two alternatives: whether the recovery to which US Airways has first claim is every cent the third party paid or, instead, the money the beneficiary took away. “Given that contractual gap, the common-fund doctrine provides the best indication of the parties’ intent,” it concluded.

In a statement to PLANSPONSOR, Myron D. Rumeld, Co-Chair, Employee Benefits, of Executive Compensation & ERISA Litigation Practice Center at Proskauer Rose LLP, said, “The Supreme Court ruling will likely be viewed favorably by plan sponsors, as it will allow them to anticipate with more certainty the impact of the plan terms they draft. Although in this particular instance the court limited the plan’s reimbursement right because of a perceived ambiguity in the plan’s terms relating to attorney’s fees, the court unanimously ruled that a clearly drafted reimbursement clause will trump all equitable defenses. Thus, if properly drafted, a reimbursement clause will allow a plan to recover the full amount of the medical costs it paid, without qualification.”

Rumeld added, “The decision is less clear, however, on the role of equity and equitable defenses in other types of suits brought under ERISA. On the one hand, the court noted that the equitable defenses relied on by McCutchen might be available for claims that are not premised on plan terms, since plan terms give rise to contractual liens that are not subject to equitable defenses. On the other hand, the court observed that the cause of action under ERISA Section 502(a)(3), on which the plan's claim was premised, does not provide a blanket form of equitable relief, but rather only that equitable relief that is necessary to enforce the terms of the plan or the statute.”

In the case, a district granted summary judgment to US Airways, agreeing the language in its benefits plan permits it to recoup money it provided for McCutchen's medical care out of the total he recovered from a third party. On appeal, the 3rd U.S. Circuit Court of Appeals concluded that US Airways' claim for reimbursement is subject to equitable limitations, and vacated the district court's judgment, remanding the case for further proceedings. In June of last year, the Supreme Court agreed to hear the case (see “Supreme Court to Revisit Reimbursement of Benefits Issue”).

The ERISA Industry Committee (ERIC), along with the American Benefits Council, the Society for Human Resource Management and the U.S. Chamber of Commerce filed with the U.S. Supreme Court an amicus curiae (“friend of the court”) brief that argued, “Indeed, if the 3rd Circuit ruling is allowed to stand, this will open the door to an influx of litigation from participants using equitable defense claims to rewrite the clear terms of a plan, and thus undermine the principles of ERISA.” (See “Groups Ask High Court to Reverse Equitable Remedies Decision”.)

The Supreme Court vacated the judgment of the 3rd Circuit and remanded the case for further proceedings consistent with its findings.